The Economist - USA (2022-05-14)

TheEconomistMay14th 2022 BriefingIndia’seconomy 19

itwasin 2014 (italsousesa digitaltolling
systemtoavoidqueues).Thenumberof
domesticairpassengershasdoubled;air­
freightvolumesareupby44%.Thereare
morethanthreetimesasmanymobile­
phone base stations, supporting 783m
broadbandsubscribers.Wall Streetpriv­
ate­equityfirmsarecompetingto create
networksofwarehousesacrossIndia.
Inadditiontoallthistarmacandcon­
creteisthe“Indiastack”,a unitarynational
digitalinfrastructurecreatedbythestate
and championed by Mr Modi. This in­
cludesAadhaar,a biometricidentitysys­
temforallIndians;a pushtomakesure
everyonehasa bankaccount;anda nation­
alpaymentssystemknownasupi. Ahuge
obstacletotradebetweenstateshasbeen
removedbytheadoptionofa nationwide
goods­and­servicestax (gst) in placeof
umpteenlocal levies. Asa result, more
businessesarebeingdraggedintotheday­
light,usingmodernbankingandperhaps
payingtaxes.Paymentsviaupihaverisen
fromtheequivalentof13%ofmonthlygdp
inJanuary 2020 to50%inApril2022.Re­
ceiptsfromgstreachedtheequivalentof
8%ofmonthlygdpinApril(seechart3 on
nextpage).Taxevasionisgettingharder.
Competitionina nationalmarketplace
hasbeenbadnewsforsmallerfirmsthat
werereliantontax­dodgingandcaptive
markets.Thecovid­19slumphitthembad­
ly,too:by someestimates,10­20% have
failedduringthepastfewyears.Invest­
mentbyhouseholds,whichoperatelotsof
tiny informal businesses, has dropped
from16%ofgdpa decadeagoto10%.Big­
gerfirmsthathavebrands,scaleandtech­
nologicalperspicacityhavegrown.Forex­
ample,Titan,theleadingfirminthejewel­
lerytrade,boostedsalesbya thirdandfloor
spaceby afifthduringthepandemic.A
newbankruptcycodethatmakesitharder
forzombiefirmstostaggeronisalsospur­
ring consolidation. Formalisation and
consolidation,inturn,presagealeapin
productivity. McKinsey, a consultancy,
reckonsIndia’stop 600 firmsare 11 times
moreproductivethantheaverage.

ThesecondpillarofIndia’snewgrowth

concernsindustry.Indiahaslongdreamed

ofbecomingafactoryfortheworld.But

manufacturing’s shareofoutput hasre­

mainedstuckat17­18%overthepastde­

cadeascorporateinvestmentbyallfirms

hasidledattheequivalentof9­12%ofgdp.

Thecountryaccountsfora paltry1.9%of

globalexportsofgoods.

Biggerandbiggerbusiness

Big companies withlarge cashflows are

lookingtochangethis.SaurabhMukherjea

ofMarcellus,anassetmanager,calculates

thatIndia’stop 20 firmsearn50%ofcor­

porateIndia’scashflows.Theyaremaking

moneyfastenoughtotakeriskswiththeir

earningsinsteadofhavingtoborrowtoex­

cess.The ambitiousgiants includecon­

glomerates—Adani(energy,transport),Re­

lianceIndustries(telecoms,chemicals,en­

ergy,retail),Tata(it, retail,energy,cars)—

and more focused giants such as jsw

(mainlysteel).

Thosefourfirmsaloneplantoinvest

more than$250bn overthenextfiveto

eightyearsininfrastructureandemerging

industries;indoingsotheyintendtode­

veloplocalsupplychains,whichfitswith

governmentgoals.MukeshAmbaniofRe­

liancesayshewillcutthepriceofgreenhy­

drogento$1perkilogramby2030,forin­

stance,fromabout$5today.Tataisrolling

out battery plants, electric vehicles and

semiconductors.Thesearehuge,riskybets

thatfewotherfirmswoulddaretake.

Thereareworriesaboutexcessivecor­

porate power,monopoliesand,in some

cases,cronyism. If thefirmsaccrue yet

more economicpowerthroughtheir in­

vestments,suchconcernswillsurelygrow.

Atthemoment,though,theratioofthose

fourfirms’profitstonationalgdpis0.7%,

halftheequivalentratioforthefourtech

giantswhicharecurrentlyAmerica’sbig­

gest companies.The government seems

happywithbigbusiness,givenitshighre­

investmentrates.

Hopingtobenefitfrommultinationals’

effortstodiversifyawayfromChina,Mr

Modi’s lieutenantsare alsohanding out

$26bninsubsidiesoverthenextfiveyears

for investment in 14 industries. These

“production­linkedincentives”(plis)pay

out as firms’ revenues expand in such

fieldsassolarpanels,batteriesandphar­

maceuticals.Samsung fromSouth Korea

andFoxconnfromTaiwanareusingplis to

makemoremobilephonesinIndia.Local

companies,suchasOlaElectric,anaffili­

ateofa bigride­hailingfirm,arealsotak­

ingadvantageofthem.Olahasbuilta large

e­scooter factory 90km from Bangalore

withthegoalofbecominga globalforce.

The government wants to catalyse

manufacturing.Thedangeristhatbenign

intentionsdegenerateintocronyismand

protectionism. Still, although $26bn

amountstoonlyroughly1%ofallexpected

corporate investment overthenext five

years,intheshortrunthepolicyishaving

theintendedeffect.

Thenewedifice’sthirdpillarisfounded

onalong­standingstrength:technology.

India’sit­servicesandoutsourcingindus­

tryhasdoubledinsizeoverthepastde­

cade.Itsannualrevenuesarenow$230bn.

ThathasmadeIndiatheworld’sfifth­big­

gestexporterofservices,despitebeingon­

ly16thingoods.Aglobalshortageofsoft­

wareengineers,andthefactthatsoftware

isincreasinglysuppliedasa servicefrom

thecloud,meanthatthetrendislikelyto

continue.India’sbiggestdifficultyisnow

finding talent. Some 5m peoplealready

workintechandthereisa red­hotmarket

fornewworkers.

Thecombinationofengineeringskills,

mobiledataanda nationaltechstackhas

createdlotsofstartups. Theyhavegone

fromprovidinge­commerce,deliveryand

ride­sharing services for the 10m­20m

richestIndiansto seekingopportunities

furtherdowntheeconomicpyramid.And

Bangalore’slow­keytechcultureisfoster­

inga newgenerationoffirmsthatareclos­

ertotheglobalfrontierofinnovation,for

example inspace,drones andbatteries.

Four such “deep­tech” firms that spoke

toTheEconomistallusedomesticresearch

anddevelopmentandaretargetingexports

foroverhalfoftheirsales.Arichventure­

capitalsystemcanfinancefirmsthrough­

outtheirlife­cycle,fromangelfundingto

publicofferings(whichfinancialreforms

havemadeeasier).Alocalventurecapital­

istreckonsthereisapipelineof10,

plausiblestartupscreatedeachyear.

The single market, industrial policy

andtechnologyseemlikelytobringabout

a pick­upingrowthfromthe5.4%year­on­

yearratereportedinthefinalquarterof

2021.A mortgagebankersays,“Ihavenever

seenthiskindofdemandforloanapplica­

tionsin 40 years.”Demandforelectricve­

hiclesisbooming,a manufacturerexults.

Capitalspendingisstartingtorevive,ac­

cordingtoanindexcompiledbycmie, an

Quitea ride

India,GDP,%changeona yearearlier

Source: National statistics

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  21201918171615142013

  
  

In the big leagues yet?

India, share of world stockmarket

capitalisation, %

Source: Bloomberg

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